Currency Watch: A familiar story

The move back to the market situation we saw at the end of 2011 is almost complete as this week comes to a close.

The euro remains under pressure as politicians vacillate further on a legitimate way to fix the debt crisis.

On the other hand, the US dollar is very strong at the moment as people look for some form of a safe haven.

The pound is caught in the middle of this polarisation, down against the dollar but hitting near-15-month-highs against the euro.

Meanwhile, there has not been much movement from central banks of late as they will be waiting to see how the year starts before pulling on any monetary policy levers.

Yesterday, the Bank of England held rates at 0.5% and asset purchases, quantitative easing, at £225 billion. The emphasis of the Monetary Policy Committee (MPC) is to keep policy loose at the moment and we think that another expansion of asset purchase will be announced in February.

Members of the MPC will likely be encouraged by upcoming inflation data which should show a significant slowing of price increases as a result of last year’s VAT increase slipping out of the year-on-year basket.

The next CPI reading is due next Tuesday and will be the last one with the 2.5 percentage point increase in VAT within it.

Similarly, in Europe, the European Central Bank kept things quiet at their meeting this week, with only a handful of analysts expecting any movement from the board.

All is quiet in this regard as it stands, but we will need some action from Europe’s political elites to emerge soon, as the pressure increases on them to make some decisive steps to save the euro. Watch this space.

Jeremy Cook is chief economist at World First foreign exchange